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The Breakfast Briefing

IBM is set to add even more fuel to the Dow’s big rally that has kicked off the new year.

Big Blue’s better-than-expected results pushed shares up more than 4% in after-hours trading. If the gains hold through the opening bell – which of course is no guarantee — IBM alone will be poised to add more than 60 points to the price-weighted Dow Jones Industrial Average.

The Dow is up 4.6% in January, its best start to a year since 1997, according to WSJ Market Data Group, leaving the blue-chip average about 450 points away from its record high hit in October 2007.

What’s more, IBM’s upbeat results could have a lasting impact. Over the last 10 years, IBM’s one-day reaction to earnings has accurately predicted the market’s direction over the ensuing five weeks 75% of the time, including each of the last four reports, according to Bespoke Investment Group.

When IBM shares have risen after earnings, the market has typically followed, and vice versa.

Bespoke cofounder Paul Hickey says the trend isn’t exactly a fluke. “IBM generates more than half of its revenues from its services unit, which has a presence in practically every S&P 500 company,” he says. “Any weakness in the performance of corporate America (or even the corporate world) will likely show up in the results of IBM. So if IBM has a strong quarter, it is likely the result of strength in corporate America.”

IBM and Google’s results should help keep the stock market’s rally chugging along.

The S&P 500 is riding a five-day winning streak and has risen in seven of the last nine trading sessions. Mixed economic readings, flattening corporate profit growth and fiscal worries in Washington so far haven’t inhibited the rally’s momentum.

But one worry that could derail the rally right now is rising giddiness among market participants. Skeptics say investor euphoria could spell trouble down the road.

“The area of concern and the most significant threat to the current rally is rapidly rising investor optimism,” says Bruce Bittles, chief investment strategist at R.W. Baird & Co. “Investor psychology is close to slipping into the extreme optimism zone that in the past has caused rallies to stall.”

He notes several investor sentiment gauges last week “indicated the highest level of optimism since last September, when the summer rally began to slow.”

Until then, the focus will remain on the earnings parade that is now in full swing. Quarterly results from Apple Inc. and Netflix Inc. due after today’s closing bell should set the stage for the market’s next move.

Morning MarketBeat Daily Factoid: On this day in 1973, President Nixon announced an agreement had been reached, putting an end to the Vietnam War.

-Steven Russolillo

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Stocks to Watch

Apple is expected to report first-quarter earnings of $13.43 a share, according to a consensus survey by Thomson Reuters.

McDonald’s is forecast to report fourth-quarter earnings of $1.33 a share.

Netflix is projected to report a loss of 13 cents a share in the fourth quarter.

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